American Monetary Institute

State Governments in Deficit Crisis

by Robert Poteat

“States of Crisis for 46 Governments Facing Greek-Style Deficits” headlines a Bloomberg website article, June 26, 2010, by Edward Robinson, referring to states of the United States.  The plight of California is one of the worst.  California’s economy, if a nation, would rank ninth in the world.  The United States federal government is in huge deficit, also.  How can this happen in the once richest nation of the world and still rated as the world’s largest economy?

The economic conditions cannot be caused by devastating acts of nature such as drought, freezes, famine by insects, floods, hurricanes, volcanic eruption, etc.  While some of these have been experienced, the United States is too large and diverse for them to cause such general havoc.

Another hypothesis is that nations follow an organic pattern.  Nations emerge, prosper, age, and die.  The United States, in its third century, is deeply in debt domestically with crumbling infrastructure.  The U. S. has huge negative trade balances causing huge debt to foreign nations.  The United States is also engaged in futile, self-destructive wars of empire.  This makes a strong case for the organic hypothesis, but is there a simpler explanation such as human mismanagement?

Anyone with grade school education must know that expense cannot exceed income without incurring deficits and debt.  Yet, 46 states and the United States find themselves in that condition.  It does not take too much investigation to find out budgets did not anticipate economic downturn.  It is irrational not to anticipate downturn because the United States has experienced economic expansions and contractions, at least 47 cycles, since its founding.  To not anticipate economic cycles requires the extraordinary denial and deception of politicians.

What causes economic cycles?  Ask three economists, and you will get at least four answers.  I think Will James said economists know more that ain’t so than anyone.

Some flagrant errors of economists are non-scientific reasoning.  They try to use “theories” to prove facts then dismiss facts that refute the “theory” as externalities.  They confuse money with real wealth of natural resources.  They do not understand the nature of money as a socio-political power while thinking of it merely as a medium of exchange.  They assume that humans always make rational economic decisions then attempt to use mathematics to “prove” the false assumptions.  They fail to understand the effects of credit used as money because credit is debt on the other side of the ledger.  They fail to understand the fallacies of ever expanding markets in a finite world.  They dismiss human suffering as an irrelevant, unscientific externality.  They have irrational faith in The Market to mediate human exchange relations.  How can we not be in a mess?

The first cause of the present economic downturn is the errant philosophy above that resulted in excessive speculation by the pirates and bandits of Wall Street and banking, a supine and oblivious Congress, ideologically blinded regulators, and decades of manufacturing deportation.  Recovery is hampered by the resulting destruction of productive economy.  Productive manufacturing has precipitously declined as a fraction of the total economy while financial services has proportionally grown.  Financial services is well defined as gambling and loan sharking.  It is not productive of human life supporting goods and services.  It is the opposite as it concentrates wealth into an ever smaller fraction of the population.

Over-arching the historic instability of the United States economy is the private bank credit system whose credit is used as money.  Since credit and debt is the same thing, we use debt as money.  The long term effect has been exponential growth of debt in all sectors of the economy.

No greater historic mistake in United States history is the abandonment of the federal government’s Constitutional and moral mandate to promote the general welfare by conceding the power to create money to private banks.  Whoever has the power to issue money has the power to direct society by directing what the money is used for.  What the money has been used for is wars and pyramid schemes.  (See The Lost Science of Money for more historical details.)

The American Monetary and Financial Security Act will restore the power to the federal government as established by Article I, Section 8, clause 5 of the Constitution:  The Congress shall have power…. to coin Money and regulate the Value thereof, and of foreign Coin…. At the present time, the federal government restricts its revenue to taxes and borrowing.  To permit banks to issue money, borrow that money, and pay interest on it has resulted in more than 13 trillions of federal debt with hundreds of billions of dollars of unnecessary interest expense, annually.

Since the Great Depression of the 1930’s, the federal government has resorted to deficit spending in attempting to correct for the recessions that are endemic in the U. S. style economy.  (The endemic reasons will not be discussed here.)  It was the recommendation of a noted economist, Sir John Maynard Keynes, hence it is called Keynesianism.

Keynesianism will have the desired effect if done in sufficient quantities, but borrowing money for Keynesian stimulus merely “kicks the can down the road” requiring more and more stimulus with resultant increase in debt.  If the government created and spent its own money there would be no deficit and no increasing debt.

The federal government has put taxpayers at risk for trillions of dollars by “bailing out” the pirates and bandits who were mostly responsible for the present recession while applying a grossly inadequate 800 billion dollars in stimulus to the people.  The banks are reported to have recovered but the economy remains depressed and public debt is increasing at an alarming and unsustainable rate.  Small banks are still failing at an alarming rate.

According to the Bloomberg article, the total shortfall of states is a mere $112 billion.  Not much more than pocket change compared to the “bail out” of banks and only a fraction of the stimulus.

Under the terms AMFSA all these economic shortfalls could be adequately funded without incurring debt.